Australia's foreign minister met Arab and Islamic ambassadors Thursday to try to soothe concerns over Canberra's stance on eastern Jerusalem, insisting there was no policy change despite moves to stop referring to it as "occupied".

The meeting followed fury after Attorney-General George Brandis said the term would not be used as it carried pejorative implications and was neither appropriate nor useful.

The Palestinian Authority's representative in Australia reacted furiously to the statement, and threatened to organize international trade sanctions over the move. Indeed, soon after eighteen diplomats from countries including Egypt, Saudi Arabia and Indonesia protested and warned of possible trade sanctions in response.

Australia's export trade with the Middle East accounts for billions of dollars annually, particularly in wheat and meat.

Foreign Minister Julie Bishop said there had been a "constructive" discussion and released a letter to the diplomats re-affirming there was no change in the government's position on the legal status of territories liberated by Israel in 1967.

"Our position is consistent with relevant UN resolutions adopted over many years, including UN Security Council Resolutions 242 and 338," it read.

"Senator Brandis' statement was about nomenclature, and was not a comment on the legal status of the Palestinian Territories."

While avoiding the term "occupied" altogether, it added that Australia continued to be a strong supporter of a two-state solution "with Israel and a Palestinian state existing side by side in peace and security".

The diplomats were furious with the comments on Jerusalem, which was annexed by Israel in a move never recognized by the international community, and concerned that it was a "substantial policy shift".

The Palestinians claim Jerusalem as the capital of their own state.

The legality of Israel's presence in Judea and Samaria is a topic of debate. While many media outlets and commentators regularly refer to Jewish communities there as "illegal under international law", many international legal experts firmly disagree. Indeed, many of the international treaties wielded as evidence of the illegality of "Jewish settlements" are not in fact applicable to Israel's control over lands liberated in 1967.

The head of the Palestinian Authority delegation to Canberra Izzat Abdulhadi said he was satisfied with the way the meeting went.

"The foreign minister was very clear about it today, that, yes, East Jerusalem is occupied. She repeated it several times," he told Sky News.

Abdulhadi added that it appeared Brandis, who said Australia would no longer call eastern Jerusalem occupied but disputed, had overstepped the mark.

"The other important development was that she said that from now on... the policy of Australia is declared by either herself or the prime minister only."